MasTec Inc (MTZ) 2007 Q4 法說會逐字稿

Good day, everyone and welcome to MasTec's 2007 fourth-quarter earnings results conference call. Just a reminder, today's call is being recorded. At this time, I would like to turn the call over to Marc Lewis, MasTec's Vice President of Investor Relations. Marc, please go ahead.

Thank you. And good morning, everyone.

Welcome to MasTec's earnings conference call for the quarter and year ended December 31, 2007.

The following statement is made pursuant to the Safe Harbor for forward-looking statements described in the Private Securities Litigation Reform Act of 1995. In these communications, we may certain statements that are forward-looking, such as statements regarding MasTec's future results, plans, anticipated trends in the industry for which we operate.

These forward-looking statements are the company's expectations on the day of initial broadcast of this conference call, February 28, 2008, and the company will make no effort to update these expectations based on subsequent events or knowledge. Various risks, uncertainties or substance or detail in our filings with the Securities & Exchange Commission. Should one or more of these risks or uncertainties materialize or should any of our underlying assumptions prove incorrect, actual results my differ significantly from results expressed or implied in these communications.

In addition, we make use of certain non-GAAP financial measures in this conference call. A reconciliation of these GAAP or non-GAAP financial measures to the most comparable GAAP financial measures can be found in our earnings release, which is posted on MasTec.com in the investor relations section.

With us today we have Jose Mas, our President and Chief Executive Officer; and Bob Campbell, Executive Vice President and Chief Financial Officer.

The format of the call will be opening remarks and analysis by Jose, followed by financial review by Bob. These discussions will be followed by a Q&A session. We expect the call to last approximately 45 minutes. I would now like to turn the call over to Jose Mas. Jose?

Thank you, Marc. Good morning, and welcome to MasTec's fourth-quarter and year-end 2007 conference call.

First, some fourth-quarter financial lights. Revenue for the quarter was $274 million, our highest revenue quarter since 2001, and up 14% from the fourth quarter of 2006.

Revenue for 2007 was 1.038 billion, a 10.4% increase over full-year 2006. Income from continuing operations was 10 million or 5 - or $0.15 per share for the fourth quarter versus $0.14 in the fourth quarter of 2006. Operating cash flow was 24.6 million for the quarter, an 11.3% increase over the fourth quarter last year, and operating cash flow for the year was $68.7 million, an increase of 49% over the prior year.

I would first like to focus on some of 2007's important accomplishments. In 2007 we addressed many Legacy issues,including the sale of our discontinued ITS business which has substantial losses and negative cash flow. We sold our underperforming Canadian operations.We accelerated the closure of Legacy legal issues, which have had a significant financial and human capital drain on the company. We exited a number of contracts that were not meeting our margin expectations. And we have increased management accountability across the board.

We also accomplished some important things related to our future. We extended our directory agreement for an additional four years. We grew a number of important strategic customer relationships. We acquired the remaining interest in our two joint ventures, which have performed very well over the last couple of years.

We finalized our senior note offering, solidifying our balance sheet to meet our future opportunities and needs. Something, which we believe is a competitive advantage, given the current state of the credit market, and we refocused our efforts on our electrical utility business and built a solid foundation heading in to 2008, including two strategic acquisitions, which will I will cover later.

I strongly believe that we took the appropriate steps in 2007 to deal with Legacy issues, improve the operations, and position the company for a very successful future.

2008 should be an excellent year for MasTec. We announced full-year guidance yesterday, and expect 2008 revenues to range between 1.125 billion, and 1.160 billion in diluted earnings per share from continuing operations to be between $0.85 and $0.90 a 27% to 34% increase over pro forma 2007.

The growth in revenue and earnings in 2000 will be driven by our performance in our core markets. Our communication business continues to deliver strong results as our customers continue to upgrade their networks and invest in their infrastructure.

In 2007, Verizon accounted for $95 million in revenue, up 22% year-over-year. Verizon continues to be committed to their deployment of fiber, and our involvement in the effort continues to be strong.

For the fourth quarter, AT&T accounted for approximately $20 million in revenue, a sequential increase and an increase of 13% over the same period last year. Embarq and Qwest were also both up fourth quarter of '07 versus fourth quarter '06. Despite the housing slow down, many of our customers are upgrading their networks and facilities, which continue to create growth opportunities for MasTec in both new and existing geographical areas.

Our in-stall to a home business had a challenging fourth quarter. As previously disclosed, the company went through a dramatic ramp-up of resources in the third quarter, and worked hard to remove alternate service providers that were brought in to our area, negatively impacting our business until late in the fourth quarter.

Today we are reclaimed our territories, demand is strong, and we have increased our work force by over 30% since first facing these challenges early in the fourth quarter. We are now positioned to better serve our customer, and expect our technician headcount to stay steady for the foreseeable future.

Revenues for the quarter were $120 million, compared to $99 million in the fourth quarter last year, an increase of 21%. DirecTV recently announced approximately 1 million new growth subscribers for the fourth quarter, continued strong demand for their services, and an increased demand for advanced product as the cost of high definition boxes continues to drop. DirecTV currently offers about 100 channels in high definition, making them the clear market leader. We expect to see continued strong demand from this customer, and have worked hard to refine our forecasting and planning tools to meet their growing demands.

In our energy utility business, we saw strong activity in the fourth quarter, driven by growth in both our traditional markets, as well as, increased services to our natural gas customers, where we are building lines for field-gathering systems. Revenues for the quarter were $63 million, compared to $48 million in the prior year, a 31% increase, and a sequential increase over the third quarter of 20%.

In 2007, we exited a number of underperforming contracts, made significant investments in both people and equipment, and executed on our plan of making strategic acquisitions to position the company for success as our customers continue to make significant investments in their infrastructure.

While new housing starts have had a significant impact on new subdivision build-outs, our diversification plan without our energy business has paid off, as we expect to see growth in this business in 2008. We expect this growth to be driven by both our transmission business and our entry in to the renewal energy space. As previously disclosed in October, MasTec acquired three-phase line construction, a transmission-line construction and maintenance provider based in the Northeast, along with our in-house capabilities, we expect a solid 2008 in this area.

In December, we acquired certain assets of Power Partners LLC. Power Partners specializes in the construction of collection systems, transmission lines, and substations for wind farm projects throughout the country. With their experience and our resources, we expect the wind farm business to be an important part of our growth strategy in 2008 and beyond. We welcome the Power Partners team to MasTec.

In all, while disappointed with our financial results for 2007, we made significant progress in positioning the company for a successful future. In spite of the overall market condition, the industries we serve are well positioned to deliver solid results in 2008.

Our customer are investing in their infrastructure and activity remains strong.

We are very optimistic about 2008.

We are off to a good start, and expect this to be an excellent year for our shareholders, stakeholders, and employees.

I will now turn over the call to our CFO, Bob Campbell. Bob?

Thank you Jose, and good morning.

As Jose mentioned 2007 was a very active year at MasTec, and the activities have positioned us well for 2008.

Let me give you a high-level recap of 2007. And then I'll provide details for both 2007 and for the fourth quarter.

My 2007 highlights are as follows.

We had a successful CEO succession with Jose take over as CEO on April 1st. We sold our money-losing DOT and Canadian businesses.

We made four acquisitions.

The two new businesses that Jose mentioned, and we bought out our partners in two others. We completed our recapitalization. With new bonds and an improved bank deal to go with the new equity we sold in 2006.

We have no significant debt maturities until 2017.

Cash flow and it liquidity were strong with cash flow from operations up 49% and we reached our goal of getting our accounts receivable DSOs under 60 days.

We changed our strategy to accelerate closure of our Legacy litigation, took a $39 million charge, and are getting the old litigation behind us at a rapid rate.

We worked hard to improve margins and exited contracts with our energy, communications and cable TV customers, and we improved our capability to meet demand on behalf of our install through a home customer, DirecTV.

All of these efforts and costs will help us in 2008.

And finally, despite these challenges, we improved our operating earnings and grew revenue at 10%. Continuing operations diluted EPS on a pro forma basis before the $39 million Legacy litigation charge was $0.67 a share, versus $0.62 in 2006.

Now, let me take you through a more detailed information about 2007, the fourth quarter and our 2008 guidance.

As I mentioned, revenue grew at 10% for the full year of 2007. We grew revenue by almost $100 million, from $940 million to $1.038 billion. We had good growth with DirecTV and Verizon and added some important new electrical utility customers. On the other side of the ledger, we exited some energy, communications and cable TV contracts that did not have acceptable margins, which hurt revenue.

Our revenue growth was without the benefit of storm revenue. There was minimal in 2007.

Continuing operations net income for 2007 was $6.3 million, versus $40 million last year. The net income for 2007 included the $39 million charge we took in Q3 to reflect our shipped and strategy to accelerate closure of our Legacy litigation claims and disputes. On a pro forma basis, without the $39 million Legacy litigation charge, 2007 continuing operations net income was $45.5 million, compared to $40 million in 2006. That's an increase of 14%.

Continuing operations diluted EPS for the full year of 2007 was $0.09, compared to $0.62 a year ago. On a pro forma basis, again, without the $39 million Q3 Legacy charges, continuing operations diluted EPS was $0.67, compared to $0.62. Gross profit margin for 2007 was 14.1% of revenue, which was flat with 2006.

While we made real progress in margin improvement in the first half of 2007, we gave it back in Q3 and Q4 with the cost and productivity issues that we had in meeting increased demand in our DirecTV operations. We also took some margin hits from exiting and cleaning up some energy and cable TV contracts.

G&A expense for 2007 was 11.1% of revenue, compared with 7.8% last year. The increase was entirely due to the $39 million Q3 charge for Legacy litigation claims and other disputes. Without the Q3 charge, on a pro forma basis, G&A expense was 7.3% of revenue, actually down 5/10th from 7.8% last year. The biggest contributor to the G&A decrease was outside legal fees, which were down about $6 million.

With the accelerated closure of Legacy litigation claims and other disputes, we believe that there should be additional reduction in outside legal costs, especially in the second-half of 2008 and beyond.

Regarding our Legacy litigation, we got pretty comprehensive disclosure in our 10-K. While I don't want to comment on individual cases, we are generally pleased with the progress in accelerating the closure of our Legacy litigation claims and other disputes. We remain optimistic that the majority of our big cases will be behind us by midyear.

That concludes my remarks about the full year of 2007. Now, I'll cover Q4.

For Q4, 2007, revenue was up 14%, and income from continuing operations was up 7%. Income from continuing operations was $9.9 million, or $0.15 diluted earnings per share on revenue of $274 million. This compares favorably with income from continuing operations of $9.3 million or $0.14 per diluted share on revenue of $240 million in Q4, 2006.

Q4 results were pretty much as we had expected, and were consistent with our guidance. But we did have the negative P&L impact that we have previously talked about regarding meeting increased DirecTV demand. The DirecTV issues had a detrimental fourth-quarter impact on cost productivity and revenue.

Also, it is important to note that our Q4 results included a $700,000 hit for lease residual values.

Switching back to full-year numbers, cash flow from operations for 2007 was up 49%, growing from $46 million to $69 million. The improved cash flow is the result of improved operating earnings, the sale of our cash-draining DOT business, and better collections. It is also helped by not having tax payments due to our $176 million federal NOL carry forward.

As a point of information, we believe we should not have any significant tax payments until at least 2010.

Our collections continue to improve as our accounts receivable days sales outstanding, or DSO's, dropped from 59 days at Q3 to 54 days at year-end 2007. The 54 days at year-end 2007, compares to 66 days at year-end 2006.

If you will remember, we set a long-term goal back in 2005 of getting below 60 days in DSOs, and we feel terrific about hitting this goal in 2007. Our financial condition and liquidity remains strong. At year end, we had $145 million in cash, cash equivalents, securities available for sale, and availability on our bank revolving line of credit.

As I mentioned, we replaced our 7.75% bonds with new 10-year bonds at 7.625% interest , and we do not have any significant debt maturities until 2017.

The recapitalization of MasTec is now complete.

I should note that at year end we had approximately $44 million of securities available for sale, which are auction-rate securities. We have reclassified the auction-rate securities out of cash and cash equivalents, and reflected them on the balance sheet as securities available for sale.

Also, we have recorded an unrealized loss of $4.8 million against equity to record a temporary impairment on 16 million of these securities that it failed auction at year end. Since year end, we have sold $8 million of our auction-rate securities at PAR. We are monitoring the market for auction-rate securities very closely and reviewing our options. With the credit markets in their current condition, we are fortunate that with our improved financial condition, we do not need to liquify our auction-rate securities near term.

For the 2007 full year, our 10 largest customers were DirecTV, 44%, Verizon, 9%, AT&T, 7%; Embarq -- Sprint 5%; Progress Energy and TXU 3% each; FPNL, Qwest and XTO Energy were all at 2%; and South Florida Water Management District was at 1.4%.

Today backlog is at roughly the $1.3 billion level, and that's an 18-month backlog number. Even though we believe that fiber deployment work will last for years, our backlog number includes only the specific work for which we have visibility.

Now moving on to 2008 guidance. We expect 2008 revenue of $1.125 billion to $1.160 billion and expect diluted earnings per share to be between $0.85 and $0.90. That's about a 10% increase in revenue, it's a 27% to 43% year-over-year increase in diluted EPS, and that's compared to our 2007 pro forma EPS, without the Q3, $39 million Legacy litigation charge.

The big year-over-year increase in earnings comes from both revenue growth and margin expansion. The pre-tax margin related to our guidance is 5% to 5.5%, and that compares to 4.4% in 2007. The 4.4% pre-tax profit margin for 2007 is pro forma, excluding the Q3, $39 million charge for Legacy litigation. The margin expansion reflecting our efforts to improve our productivity, and to exit contracts with unacceptable margins.

As we have said before, margin improvement remains the number one priority at MasTec.

For your information, our short-term pre-tax profit margin goal is 6%, and the upper end of our '08 guidance is approaching that. Our best years historically have been well above 6%, but we'll get closer to our 6% short-term goal before going public with our longer-term aspirations. Note that I'm talking about pre-tax margins. With our large NOL carry forward, we are not accruing book taxes or paying cash tax. We believe that we will be -- we will not be accruing any significant book taxes until the second half of 2009, or paying significant amounts of cash taxes until at least 2010.

While we don't normally give quarterly guidance, we're electing this year to provide you with Q1 guidance. We're giving Q1 guidance this year because we know some of you struggle with how to gauge the normally slow, low-volume first quarter, and also to help you gauge the impact of our return to normality with DirecTV.

Revenue for the first quarter of 2008 is expected to be between $250 million and $260 million with diluted earnings per share of $0.11 to $0.12. The revenue compares to $241 million in Q1 last year. The $0.11 to $0.12 diluted EPS guidance compares to $0.11 in 2006.

However, last year's $0.11 includes $0.04 for the gain on the sale of one of our facilities. Therefore, the $0.11 to $0.12 for Q1, 2008, compares to last year's $0.07 of actual operating profits.

With a strong first half of 2007, followed by a challenging second-half for 2007, we are excited about regaining our earnings momentum in Q1 and for 2008. The angle and quarterly guidance does not include the impact of our previously disclosed Legacy litigation, neither positive or negative. That concludes my remarks. Now let me turn the call back to the conference operator for the Q&A

Thank you, sir. Ladies and gentlemen, our question-and-answer session will conducted electronically. (Operator instructions) Our first question will come from Alex Rygiel with FBR.

Thank you, nice quarter, gentlemen.

Thank you, Alex.

Jose, can you talk a little bit about some of the acquisitions that you have made. Particularly, the Power Partners Acquisition, and what your longer-term opportunity is within the wind farm market? And also talk about the developments of your transmission business over the last 12 months, and what do you anticipate in 2008?

Sure, Power Partners, we think is an important acquisition for us.

Power Partners was actually involved in a joint venture previously, where they were doing wind farm projects with a financial backer, and that joint venture ended, and we purchased the operating unit of that joint venture, which was Power Partners and are beginning to build a new wind farm business.

So we're really excited about that and the prospects in 2008.

There's a lot of activity currently in that market and we're involved with it, and hopefully over the next few quarters we'll be able to announce some contract wins and a little bit more about what we plan to do in that industry.

From a transmission side of the business, I think our acquisition of Three Phase Line was very important as it gave us a new geography to really go a after. I think we have been somewhat successful in 2007, although probably at a slower pace than we would have liked.

We got a lot of new accounts. A lot of new customers. And I think activity will be very strong in that market for a long period of time. We expect it to be a very positive market for MasTec as well.

What are the challenges obviously was DirecTV in the second half of 2007.

Can you update us on how many techs you actually have out in the field now? And what sort of growth you anticipate from that customer throughout 2008?

I can, Alex.

We have got just under 4,000 employees today working for DirecTV. It's within the count that we expected towards the second half of our third quarter. You know, we're -- we're excited -- Q1 started off strong.

You know, there's obviously a lot of noise out there from the overall economy and DirecTV recently had their earnings announcement where they were very positive on their expectations for 2008.

So we actually are expecting, you know, Q1 and Q2 to be slower like they typically are. Again, with the normalized pickup in Q3, due to the NFL package and really going into the retail season in Q4. So we kind of expect the same trends that we typically had on a year-over-year basis. Probably with a little less growth this year than we traditionally had with them.

But, again, activity is strong, and, you know, we did a great job at growing our resource base there, getting our technicians productive, continuing to make our technicians more efficient, which we think will ultimately improve our profit margins in that business. So we think we're do all of the right things.

We think 2008 is going to be an excellent year for us. More importantly, a much more predictable year for us than we had over the last two years. So I think that's probably the most important take away, that we really don't expect to have the big ebbs and flows that we have had in the past.

Jose, I am a little confused, so maybe you can help me. At the end of June of '07, you had about 2800 techs. Today you have got about 4,000 employees. That would -- that would imply that your employee growth rates up 43%. Why won't your revenues track that type of employee growth?

Well, A, you know, I think we said late in the fourth quarter. We didn't have all of our markets back. So we didn't get all of our markets back until late in the fourth quarter.

So you wouldn't have seen a lot of that growth through Q4. I think that, you know, the opportunity is there. If the volume continues for DirecTV for us to have an excellent year. I think we have also got to be realistic as to what is happening in the overall market, and understand that we would rather be conservative going in to 2008.

So our employee count is up. Rather that working our guys six days a week. Part of the plan is to put our guys on normal five-day schedules and rotate. We have the resources there to dramatically ramp and the resources there to hold steady if volume isn't as strong as we expected.

Very helpful. Thank you.

Thanks, Alex.

And our next question will come from Simon Leopold with Morgan Keegan.

Thank you.

I wanted to see if we could talk a little bit about your proportionate of business and the outlook, particularly for the first quarter. We're coming off of a very strong utilities quarter here. There is seasonality. What assumptions are build in to the guidance in terms of mix?

You know, I think the mix is historically similar. I think you are going to continue to see our energy utility business ramp, versus, you know, previous year.

I think that when you look at 2007, the challenges that we had in that industry over the first three quarters were the difficult comps we had over 2006 because we exited a number of contracts early in 2007, which made comparables difficult for the first three quarters. That trend reversed itself. Our fourth quarter of '06 was a little bit slower. And our fourth quarter of '07 was a lot stronger.

So, you know, for the year we're expecting significant growth in that -- in that group of customers. We think it will probably be our highest growth rate customer base that we have. As it rolls the quarter, we'll see that enhance as the year goes on. So we'll probably see greater growth going in to Q2, Q3, and Q4, but I think it's a trend you can expect for the rest of the year.

And is it fair to think of normal seasonality as a decline sequentially of about 10%?

Well, you know, if you look at our overall guidance we have about an 8% upswing from the high end of our guidance versus where we were last year.

So I think if you look at last year's numbers and you take similar growth rates, I think that's probably an appropriate breakdown of where we'll be.

Okay. Next is shifting over to your business with AT&T.

It looks like that was up sequentially by quite a bit, almost -- I guess 29, 30% sequential rise. And I understand you are involved in some of the U verse. If you could give us a sense of how much of your business with AT&T is tied to maintenance activities and how much is related to their access upgrade initiatives.

Sure, just to clarify. On a sequential basis, we were up about -- about 7%. We were actually down about 7 -- I'm sorry.

We were up about 19% on a sequential basis, not -- not the 30.

Okay.

I think two things. I think A, you know, with we are seeing the normal maintenance markets within AT&T struggle.

There's no question that the impact on the housing is having an effect on your new subdivision growth.

However, I do see an increase spend on their U-verse activities.

So as we look at 2008 for the full year, we expect considerable U-verse growth, which will ultimately lead to overall growth with the customer even though there is market segments within that customer that are struggling.

Great. And just sort of the classic housekeeping, if you could round out on a quarterly basis the top 10 customers?

One second. For the fourth quarter, the top 10 customers, DirecTV, 44; Verizon 8, AT&T, 20, Embarq, 11, Progress Energy, 7, Qwest, 6.2, Kahuna,, 6%, TXU -- I'm sorry -- I gave you a couple that were the dollar amounts. Verizon was 7% -- apologize -- Embarq was 4, Progress Energy 2.6, Qwest 2.3, Kahuna, 2% - 2.2, TXU 2%, American Electric Power 2, Florida Power and Light, 1.4, XTL Energy 1.3, and Dominion Virginia Power 1.3.

And the other question on house keeping is - where do your D&A line going? It did step up, I assume related to some of the acquisitions. I wondering what we should model for at least the depreciation in the March quarter for 2008.

If you look at our CapEx, we actually spend a little bit more in CapEx in Q4 than we traditionally had. Part of that was for the anticipated growth in some of our markets.

We do believe there should be somewhat of a shift. You will see that number grow a little bit through 2008. So you can probably expect that number around 2% or in the very low 2's for the full year of '08.

And depreciation on the dollar basis in the March quarter? What are you thinking?

You know, somewhere close to the same percentage.

Okay.

Maybe a little bit less just because we're ramping.

Okay. Great. Thank you very much.

Thank you Simon.

(Operator Instructions) And we'll go next to Eric Kainer with Thinkequity.

Thank you, and congratulations on a solid quarter.

Thank you, Eric.

I would like to go to the energy business. Obviously, that did very well sequentially.

I wondered if you could tell us how much of that -- of the sequential jump came from the acquisitions? Obviously, Power Partners was kind of late in the quarter. And then how big relatively speaking is Power Partners? What have they done historically for revenues.

Sure, from the acquisition perspective, it was a very small number in the fourth quarter.

We have always said Three Phase is not a large company. It is a smaller company, but what we love about it is - we think it opens up a new geographic area for us that we'll ultimately be able to grow substantially.

From Power Partners perspective, they probably were involved in somewhere around $50 million in projects in 2007. We don't have them forecasted at anywhere near that number, partly because we bought the assets and the operating individuals. We'll start that work within MasTec somewhat from scratch. So we really got to build up our backlog. So we have got a more modest number in our 2008 numbers. But with that said, you know, the opportunity is there to do that and more.

Okay. That's very helpful.

Let's see, the next question is, about the DirecTV staff. I mean, obviously, there had been a problem there. Specifically about the training and then the retention.

I wondered if you can give us give up color about what the retention patterns you are seeing given the new incentives that you implemented there?

You know, Eric, we believe in improved although it continues to be an issue. You know, we probably hired at our peak, about 1700 employees and as you can see from the numbers we probably ended up somewhere at close to net a 1,000. So there was significant leakage.

You know, a lot of it is, you know, when you go through a ramp in short a short period of time you end up having fallout.

I think from the overall base of the business, when you look at employees that have been here for a period of time, I think we made dramatic improvements in our retention of those employees and have shifted a loft of the retention from being guys that -- the older guys - the guys that have been here a long time that are more efficient. Churn has gone way down and we still haven't found a way to control churn at the entry level. We continue to work at it.

But again, we expect this year to be much more consistent without the dramatic hiring peaks which we think will really help us manage that business a lot better.

That's great, and obviously we're hopeful that you were able to achieve just that.

And just last question, and this is also on DirecTV, you mentioned that -- that you -- extended your contract there for an additional four years. I wonder if there are any material changes as far as, you know, SLAs or anything along those lines that maybe would be useful to bring up here?

You know, there wasn't Eric, it's pretty much -- we have got an standard agreement that we have used for a long time. There were a lot of changes.

None that we thought were really that important to be honest in terms of having to disclose, so, you know, for us it's four new years with them, and what we think has been a great relationship, and from a financial perspective and metrics perspective, everything is pretty much very similar.

Okay. Great. Thank you and good luck.

Thank you, Eric.

And having no other questions in queue, at this time I'll turn the call back to Jose Mas for closing remarks.

I would like to take the men and women of MasTec for their hard work and dedication in 2007. And I would like to thank you for your participation on MasTec's 2007 fourth-quarter and year-end call. We look forward to our first quarter call in a couple of months. Thank you.

Ladies and gentlemen, thank you for your participation. This does conclude today's conference, and you may now disconnect your phone line.